SEC Drafting Proposals on Sponsored Access, HFT

At SIFMA’s Annual Meeting in New York this week, SEC Chairman Mary Schapiro was on hand to deliver a speech on “The Road to Investor Confidence.”

Schapiro announced that she has asked her staff to come up with two new market structure proposals focusing on sponsored exchange access, in particular naked access where firms directly trade on exchanges through their broker’s access, and high frequency trading.

“In recent weeks we have proposed rules that would address the inequities of flash orders and dark pools of liquidity,” said Schapiro. “But I believe there is much more to do to bring about greater market transparency and fairness.”

Schapiro noted that the risks around sponsored exchange access are driving the commission’s work. “It will focus on arrangements that enable unfiltered access to non-regulated entities – in many cases, high frequency traders – to exchange systems,” said Schapiro.

She explained, “I liken it to giving your car keys to a friend who doesn’t have a license and letting them drive unaccompanied.”

Schapiro added that the concern is that broker-dealers perform vital gatekeeper functions and that they are important to maintaining the integrity of the markets. “We should not sacrifice the stability and fairness of the markets to give a trader a millisecond advantage,” she said.

“I recognize some markets have been seeking to address this issue, but I also worry that competitive pressures could delay an effective solution – one that would apply across all markets to assure a level playing field for all investors,” Schapiro said.

Schapiro also explained that the second proposal on high frequency trading would look for a deeper understanding of strategies and activities of high frequency traders and the potential impact on the markets and investors. “We need to consider whether there are additional legislative authorities needed to address new types of market professionals whose activities may not be sufficiently regulated,” she said.

She explained that the SEC is also currently seeking public comments on dark liquidity in all forms from dark pool ATSs to internalization pools at major firms, dark order types on exchanges and ECNs. In addition she said that the SEC is expecting to seek public comment on co-location and she has also asked her staff to review rules governing ATSs.

Schapiro also pointed out that one of the gaps the SEC is looking to fill is in the area of hedge funds, which “have flown under the regulatory radar for far too long.”

“The administration has recommended- and I support – a requirement that advisers to private funds register with the SEC. And I will work with Congress to avoid creating broad new carve-outs of exceptions that could come back to haunt investors years later,” she said.